NABORS INDUSTRIES LTD

Note 12 Income Taxes

Income (loss) from continuing operations before income taxes consisted of the following:


	Year Ended December 31,
United States and Other Jurisdictions	2017		2016		2015
	(In thousands)
United States	$	(369,162)	$	(728,589)	$	(264,919)
Other jurisdictions		(210,922)		(469,486)		(162,616)
Income (loss) from continuing operations before income taxes	$	(580,084)	$	(1,198,075)	$	(427,535)

Income tax expense (benefit) from continuing operations consisted of the following:


	Year Ended December 31,
	2017		2016		2015

	(In thousands)
Current:
U.S. federal	$	(160,761)	$	(19,937)	$	5,088
Outside the U.S.		59,491		31,846		76,550
State		(810)		2,871		8,227
	$	(102,080)	$	14,780	$	89,865
Deferred:
U.S. federal	$	49,020	$	(164,297)	$	(182,518)
Outside the U.S.		(26,684)		(14,641)		1,757
State		(3,226)		(22,673)		(7,142)
	$	19,110	$	(201,611)	$	(187,903)
Income tax expense (benefit)	$	(82,970)	$	(186,831)	$	(98,038)

A reconciliation of our statutory tax rate to our worldwide effective tax rate consists of the following:


	Year Ended December 31,
	2017		2016		2015
	(In thousands)
Income tax provision at statutory (Bermuda rate of 0%)	$	—	$	—	$	—
Taxes (benefit) on U.S. and other international earnings (losses) at greater than the Bermuda rate		(98,119)		(181,426)		(109,101)
Increase (decrease) in valuation allowance		29,165		17,865		22,655
Impact of Tax Reform Act		138,635		—		—
Tax reserves and interest		(148,615)		(3,468)		(12,679)
State income taxes (benefit)		(4,036)		(19,802)		1,087
Income tax expense (benefit)	$	(82,970)	$	(186,831)	$	(98,038)
Effective tax rate		14.3%		15.6%		22.9 %

The decrease attributable to tax reserves during 2017 was primarily due to the release of reserves due to favorable audit outcomes during the year of $167.0 million. As a result of the Tax Reform Act, we were required to revalue deferred tax assets and liabilities from 35 percent to 21 percent which resulted in a provision of $138.6 million to income tax expense. We believe the other provisions of the Tax Reform Act did not have a material impact on our consolidated financial statements.

Our preliminary estimate of the Tax Reform Act and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Reform Act, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Reform Act may require further adjustments and changes in our estimates. The final determination of the Tax Reform Act and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Reform Act in accordance with SAB 118.

The components of our net deferred taxes consisted of the following:


	December 31,
	2017		2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	1,974,658	$	1,826,656
Equity compensation		10,281		36,972
Deferred revenue		14,005		31,082
Tax credit and other attribute carryforwards		131,640		91,680
Insurance loss reserves		6,626		5,118
Accrued interest		234,033		357,285
Other		80,492		115,909
Subtotal		2,451,735		2,464,702
Valuation allowance		(1,869,490)		(1,807,728)
Deferred tax assets:	$	582,245	$	656,974
Deferred tax liabilities:
Depreciation and amortization for tax in excess of book expense	$	146,448	$	288,088
Variable interest investments		—		641
Other		27,132		11,154
Deferred tax liability	$	173,580	$	299,883
Net deferred tax assets (liabilities)	$	408,665	$	357,091
Balance Sheet Summary:
Net noncurrent deferred tax asset (1)	$	419,003	$	366,586
Net noncurrent deferred tax liability		(10,338)		(9,495)
Net deferred tax asset (liability)	$	408,665	$	357,091

(1)

This amount is included in other long-term assets.

For U.S. federal income tax purposes, we have net operating loss (“NOL”) carryforwards of approximately $398.0 million that, if not utilized, will expire between 2031 and 2036. The NOL carryforwards for alternative minimum tax purposes are approximately $383.0 million. Additionally, we have NOL carryforwards in other jurisdictions of approximately $7.1 billion of which $550.0 million, if not utilized, will expire at various times from 2018 to 2037. We provide a valuation allowance against NOL carryforwards in various tax jurisdictions based on our consideration of existing temporary differences and expected future earning levels in those jurisdictions. We have recorded a deferred tax asset of approximately $1.71 billion as of December 31, 2017 relating to NOL carryforwards that have an indefinite life in several non‑U.S. jurisdictions. A valuation allowance of approximately $1.70 billion has been recognized because we believe it is more likely than not that substantially all of the deferred tax asset will not be realized.

In addition, for state income tax purposes, we have NOL carryforwards of approximately $744.0 million that, if not utilized, will expire at various times from 2018 to 2037.

The following is a reconciliation of our uncertain tax positions:


	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Balance as of January 1	$	179,255		$	188,376		$	201,338
Additions based on tax positions related to the current year		—			—			384
Additions for tax positions of prior years		25,119	(1)		3,873			—
Reductions for tax positions for prior years		(171,171)	(2)		(11,547)	(3)		(9,234)	(4)
Settlements		—			(1,447)			(4,112)	(5)
Balance as of December 31	$	33,203		$	179,255		$	188,376

(1)

Includes $12.0 million reduction in Norway, $9.0 million in the U.S. and $2.0 million in Egypt.

(2)

Includes $167.0 million related to internal restructuring.

(3)

Includes $7.2 million related to the expiration of statute of limitations in Australia, Algeria and Mexico, a $2.0 million reduction to Trinidad and $2.1 million related to foreign currency translation.

(4)

Includes a $6.0 million reduction in Canada, Trinidad and the U.S., $2.0 million related to foreign currency translation and $1.1 million due to the expiration of statute of limitations.

(5)

Includes $5.0 million related to settlements in Colombia, Ecuador, U.S. and Canada.

If the reserves of $33.2 million are not realized, this would favorably impact the worldwide effective tax rate. As of December 31, 2017, 2016 and 2015, we had approximately $9.7 million, $9.2 million and $7.4 million, respectively, of interest and penalties related to uncertain tax positions. During 2017, 2016 and 2015, we accrued and recognized estimated interest and penalties related to uncertain tax positions of approximately $0.5 million, $0.6 million and $1.4 million, respectively. We include potential interest and penalties related to uncertain tax positions within our global operations in the income tax expense (benefit) line item in our consolidated statements of income (loss).

It is reasonably possible that our existing liabilities related to our reserve for uncertain tax positions may increase or decrease in the next twelve months primarily due to the completion of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of changes in our existing liabilities due to various uncertainties, such as the unresolved nature of various audits.

We conduct business globally and, as a result, we file numerous income tax returns in the U.S. and non-U.S. jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as Algeria, Canada, Mexico, Saudi Arabia and the United States. We are no longer subject to U.S. Federal income tax examinations for years before 2015 and non-U.S. income tax examinations for years before 2007.